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The Fintech Trilemma

Regulators around the world have made it a top policy priority to respond to the exponential growth of financial technology (or “Fintech”) in the post-Crisis era. Mapping traditional regulatory strategies to new technological ecosystems has, however, proven conceptually difficult. Part of the challenge lies in the inherent tradeoffs involved in the complex work of supervising technologies that can both help and hurt consumers and market participants. Problems also arise from the common assumption that today’s Fintech is a mere continuation of the story of innovation that has shaped finance for centuries.

Brummer and Yadav provide a theoretical framework for understanding and regulating Fintech by showing how today’s supervision of financial innovation is invariably bound by what can be described as a policy trilemma. Specifically, the authors argue that when seeking to provide clear rules, maintain market integrity, and encourage financial innovation, regulators have long been able to achieve, at best, two out of the three goals. Moreover, today’s innovations exacerbate these tradeoffs by introducing complexity and regulatory uncertainty as young start-ups routinely disintermediate Wall Street incumbents and reconfigure traditional financing operations with exciting but untested products and services. To address these challenges, this paper indicates for a reconceptualization of existing regulatory strategies as operating across a spectrum of possible responses, and propose supplemental administrative tools to support not only market, but also regulatory experimentation.